Question

Assume the 3-month interest differential for the british pound minus the euro is equal to 0.03. The 6-month interest differential is equal to 0.08. IS the British pound selling at a premium or a discount relative to the euro? How is the expected rate of pound appreciation or depreciation changing over time

Answer 1

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The British pound is selling at a premium relative to the euro. The expected rate of pound appreciation is increasing over time, as the 6-month interest differential is higher than the 3-month interest differential.